Borrowing money — whether for a home, a car, an education, or a business — comes with its own vocabulary. Understanding these common terms can help make comparing loan offers easier and less confusing. This glossary breaks down the terms borrowers most often encounter across mortgages, credit, and consumer loans, organized alphabetically.
Amortization
Amortization is the process of paying off a loan through regular payments that cover both principal and interest. Early payments typically apply more toward interest, while later payments apply more toward principal. An amortization schedule calculator shows how a balance declines payment by payment over the loan's term.
APR vs. Interest Rate
The interest rate is the cost of borrowing, applied to the principal balance. APR (annual percentage rate) is broader, adding in certain fees like origination charges to reflect the loan's fuller yearly cost. Because it bundles in more costs, APR is often a more useful way to compare offers from different lenders.
Appraisal
An appraisal is an independent professional estimate of a property's market value, typically required before a mortgage is approved. It confirms the home is worth at least the loan amount and factors into calculations like loan-to-value ratio.
Balloon Payment
A balloon payment is a large lump sum due at the end of certain loan terms, after smaller payments that don't fully pay down the balance. Borrowers with balloon loans generally need a plan — refinancing, selling the asset, or savings — to cover that final payment.
Closing Costs
Closing costs are the fees paid when finalizing a loan, commonly including appraisal fees, title insurance, and origination charges. These are typically due at closing and can add up to a meaningful share of the loan amount; see closing costs explained for a full breakdown.
Collateral
Collateral is an asset pledged to secure a loan, giving the lender the right to seize it if the borrower defaults — a house for a mortgage, a car for an auto loan, and so on. Secured loans backed by collateral typically carry lower rates than unsecured loans since lender risk is reduced.
Cosigner
A cosigner takes on legal responsibility for a loan alongside the primary borrower, usually because that borrower has limited credit history. If payments are missed, the cosigner becomes responsible for the debt, and both parties' credit can be affected.
Credit Utilization
Credit utilization is the percentage of available revolving credit currently in use. Lower utilization is generally viewed favorably by credit scoring models, while high utilization can lower scores even with on-time payments — see how credit scores are calculated for the fuller picture.
Debt-to-Income Ratio (DTI)
DTI compares total monthly debt payments to gross monthly income, expressed as a percentage. Lenders use it as a key measure of a borrower's capacity to take on more debt; see debt-to-income ratio explained.
Default
Default happens when a borrower fails to meet a loan's legal obligations, most often by missing payments for an extended period. Consequences can include credit damage, collections, repossession or foreclosure, and legal action.
Deferment
Deferment is a temporary, often qualification-based postponement of payments, common on federal student loans. Depending on the loan type, interest may or may not keep accruing during this period.
Discount Points
Discount points are optional upfront fees paid to a mortgage lender in exchange for a lower interest rate over the loan's life. Whether paying points is worthwhile generally depends on how long the borrower plans to keep the loan.
Earnest Money
Earnest money is a deposit a homebuyer submits with a purchase offer to show serious intent, held in escrow and applied toward the purchase at closing. Backing out without a valid contractual reason can mean forfeiting it to the seller.
Equity
Equity is the portion of a home's value the owner actually owns — current market value minus any outstanding loan balance. It grows as the loan is paid down and, potentially, as the property's value rises.
Escrow / Escrow Account
Escrow refers to funds held by a neutral third party until conditions are met, such as closing on a home sale. On an ongoing mortgage, an escrow account collects portions of the borrower's payments to cover property taxes and homeowners insurance, paying those bills when due.
Fixed-Rate vs. Adjustable-Rate (ARM)
A fixed-rate loan keeps the same interest rate for its entire term, giving predictable payments. An adjustable-rate mortgage starts with a fixed rate for an initial period, then adjusts periodically with a market index. See fixed-rate vs. ARM mortgages for more detail.
Forbearance
Forbearance is a temporary, lender-approved reduction or pause in payments, typically due to financial hardship, without the loan being considered in default. Interest usually keeps accruing, and paused amounts are generally repaid later.
Grace Period
A grace period is a window after a due date (or after disbursement, for many student loans) during which a payment can be made, or repayment begun, without penalty. Terms vary significantly by loan type and lender.
Hard Inquiry vs. Soft Inquiry
A hard inquiry happens when a lender checks credit as part of a formal application, which can cause a small, usually temporary score dip. A soft inquiry, like checking your own credit, doesn't affect scores. See how hard inquiries affect credit.
HELOC (Home Equity Line of Credit)
A HELOC is a revolving line of credit secured by home equity, letting a borrower draw, repay, and draw again during a defined period. It differs from a home equity loan, which pays out a single lump sum with fixed payments — see home equity loans vs. HELOCs.
Loan-to-Value Ratio (LTV)
LTV compares a loan amount to the appraised value of the asset securing it. A lower LTV generally signals more equity or a larger down payment, which lenders often reward with better rates or reduced insurance requirements, such as avoiding PMI.
Origination Fee
An origination fee is a lender charge for processing a new loan, often a percentage of the loan amount. It's typically deducted from proceeds or added to closing costs and is one reason a loan's APR can run higher than its stated rate.
PMI (Private Mortgage Insurance)
PMI protects the lender, not the borrower, in case of default, and is typically required on conventional mortgages with a down payment below a certain threshold. It adds to the monthly payment until enough equity is built; see PMI explained.
Preapproval vs. Prequalification
Prequalification is an informal, preliminary borrowing estimate based on self-reported information, usually without a hard credit check. Preapproval is a more formal process with verified documentation and typically a hard inquiry, carrying more weight with sellers and lenders.
Principal
Principal is the original amount borrowed, or the remaining balance owed before interest. Payments toward principal reduce the actual amount owed, distinct from payments covering accrued interest.
Refinance
Refinancing replaces an existing loan with a new one, often to secure a lower rate, change the term, switch rate types, or access equity. It typically involves its own fees or closing costs, which should be weighed against potential savings.
Subordination
Subordination determines which lender gets paid first among multiple loans secured by the same asset if a borrower defaults. A subordination agreement is often needed when refinancing a first mortgage while a second mortgage or HELOC stays in place.
Title Insurance
Title insurance protects against financial loss from title defects, such as undisclosed liens or ownership disputes. Lenders typically require a policy protecting their interest, and buyers can separately purchase an owner's policy for their own protection.
Underwriting
Underwriting is how a lender evaluates a loan application to decide whether — and on what terms — to approve it. It typically reviews income, credit history, assets, debt levels, and, for secured loans, collateral value.